“Statement Analysis is the most accurate way of determining if a person is lying in a verbal or written statement. A person cannot give a lengthy deceptive statement without revealing that it is a lie. This is because people's words will betray them.”

-Mark McClish, creator of the Statement Analysis method

HOW WE ARE USING STATEMENT ANALYSIS

Reading conference call/analyst meeting transcripts is a key part of the analyst’s job. We all use words to define our reality, and our choice of words can be revealing. The premise of Statement Analysis is that a person’s choice of specific words can reveal when there might be an attempt at deception. This Statement Analysis exercise looks exclusively at a company’s written and verbal statements. Using these hidden clues, we can dig deeper into a company’s public pronouncements for signals of potential concerns in a company’s reporting.

TIMING OF THE CALL

On December 23rd at 11am we will be hosting a conference call on Statement Analysis and how we apply it to our own financial analysis. On the call will be Mark McClish, creator of the Statement Analysis system and a federal law enforcement official for the past 26 years. We will provide the names of the companies discussed on the day of the call.

MARK MCCLISH BIO

In 1990, Mark was promoted to the position of Inspector/Instructor at the U.S. Marshals Service Training Academy located at the Federal Law Enforcement Training Center in Glynco, GA. He taught at the Training Academy for nine years serving as the lead instructor on interviewing techniques. He used this time to study deceptive statements and conduct research on deception. Based on his findings, he created the Statement Analysis techniques for detecting deception in a verbal and written statement. While assigned to the Training Academy Mark was also the lead defensive tactics instructor for the Marshals Service.

Mark retired from the Marshals Service in 2009 and started Advanced Interviewing Concepts. His company provides interviewing skills training and assists investigators in analyzing statements.

“Statement Analysis is the most accurate way of determining if a person is lying in a verbal or written statement. A person cannot give a lengthy deceptive statement without revealing that it is a lie. This is because people's words will betray them.”

-Mark McClish, creator of the Statement Analysis method

HOW WE ARE USING STATEMENT ANALYSIS

Reading conference call/analyst meeting transcripts is a key part of the analyst’s job. We all use words to define our reality, and our choice of words can be revealing. The premise of Statement Analysis is that a person’s choice of specific words can reveal when there might be an attempt at deception. This Statement Analysis exercise looks exclusively at a company’s written and verbal statements. Using these hidden clues, we can dig deeper into a company’s public pronouncements for signals of potential concerns in a company’s reporting.

TIMING OF THE CALL

On December 23rd at 11am we will be hosting a conference call on Statement Analysis and how we apply it to our own financial analysis. On the call will be Mark McClish, creator of the Statement Analysis system and a federal law enforcement official for the past 26 years. We will provide the names of the companies discussed on the day of the call.

MARK MCCLISH BIO

In 1990, Mark was promoted to the position of Inspector/Instructor at the U.S. Marshals Service Training Academy located at the Federal Law Enforcement Training Center in Glynco, GA. He taught at the Training Academy for nine years serving as the lead instructor on interviewing techniques. He used this time to study deceptive statements and conduct research on deception. Based on his findings, he created the Statement Analysis techniques for detecting deception in a verbal and written statement. While assigned to the Training Academy Mark was also the lead defensive tactics instructor for the Marshals Service.

Mark retired from the Marshals Service in 2009 and started Advanced Interviewing Concepts. His company provides interviewing skills training and assists investigators in analyzing statements.

THE HEDGEYE MACRO PLAYBOOK

Takeaway:The current degree of momentum deterioration at the single stock level is well shy of the OCT '07 bull-market top, implying further upside.

THEMATIC INVESTMENT CONCLUSIONS

Long Ideas/Overweight Recommendations

iShares National AMT-Free Muni Bond ETF (MUB)

Consumer Staples Select Sector SPDR Fund (XLP)

Health Care Select Sector SPDR Fund (XLV)

Vanguard Extended Duration Treasury ETF (EDV)

iShares 20+ Year Treasury Bond ETF (TLT)

Short Ideas/Underweight Recommendations

iShares Russell 2000 ETF (IWM)

SPDR S&P Regional Banking ETF (KRE)

iShares MSCI European Monetary Union ETF (EZU)

iShares MSCI France ETF (EWQ)

SPDR S&P Oil & Gas Exploration & Production ETF (XOP)

QUANT SIGNALS & RESEARCH CONTEXT

More Upside for the S&P 500?: One of the conventional “isms” of stock market analysis is that benchmark indices tend to peak well after broad-based signs of deterioration have emerged “underneath the hood”, so to speak.

There’s a number of ways to measure market breadth on a trending basis (e.g. % of stocks making new highs, % of stocks correcting, % of stocks crashing, etc.), but we thought we’d focus on a very simple measure(s) in order to hone in on where we might be in the context of the U.S. stock market cycle. Such honing in is especially critical in the context of what some have termed the “7-year itch”: 2000 bull-market top => 2007 bull-market top => 2014 bull-market top?

In the charts below, we show the percentage of Russell 3000 constituent stocks that were below their respective 50-day and 200-day moving averages at critical closing price highs in the S&P 500 since mid-2007, ultimately comparing recent peaks with what we have seen historically. Obviously simple moving averages are what they are – i.e. simple – but to the extent we're only using them to measure momentum and NOT to manage risk, we think they are an appropriate measure for our study.

The key takeaway is that the current degree of momentum deterioration at the single stock level is well shy of the October 2007 bull-market top, which would tend to support any belief that this current bull market has further upside. How much upside is a conclusion we unfortunately cannot draw from this (or any other) analysis, but at the very least it remains directionally bullish – for now.

July 19, 2007 peak:a considerable degree of negative momentum, with just shy of half of all stocks below their 50DMAs:

October 9, 2007 peak:a substantial degree of negative momentum, with over half of all stocks below their 50DMAs and nearly 60% of stocks below their 200DMAs:

April 23, 2010 peak:a substantial degree of positive momentum, with the overwhelming majority of stocks above their 50DMAs and 200DMAs:

April 29, 2011 peak:a substantial degree of positive momentum, with the overwhelming majority of stocks above their 50DMAs and 200DMAs:

April 2, 2012 peak:a substantial degree of positive momentum, with the overwhelming majority of stocks above their 50DMAs and 200DMAs:

September 14, 2012 peak:a substantial degree of positive momentum, with the overwhelming majority of stocks above their 50DMAs and 200DMAs:

September 18, 2014 peak:a considerable degree of negative momentum, with just shy of half of all stocks below their 50DMAs and 200DMAs:

December 5, 2014 peak:a noteworthy degree of negative momentum, with nearly 40% of all stocks below their 200DMAs:

Last price:a noteworthy degree of negative momentum, with nearly 40% of all stocks below their 200DMAs:

Again, this analysis does not imply a considerable degree of further upside for the SPX; nor does it imply that we are now broadly bullish on the U.S. equity market.

That being said, we remain bullish on the sectors and style factors that have tended to outperform in historical instances of #Quad4 (i.e. healthcare, consumer staples, utilities, REITs and mega-caps) and this analysis would support an expectation of positive absolute returns for those exposures from here to the extent that market beta remains positive.

On that note, Keith's immediate-term risk range for the SPX currently has upside to 2090 and the index remains bullish TREND and TAIL as well. Given the current "poor, but not terrible" state of trending market breadth, one could argue that we need to see a substantial degree of deterioration at the single stock level over the next ~20 point rally for any price near 2090 to be the ultimate crescendo of this raging bull market.

#Quad4(introduced 10/2/14): Our models are forecasting a continued slowing in the pace of domestic economic growth, as well as a further deceleration in inflation here in Q4. The confluence of these two events is likely to perpetuate a rise in volatility across asset classes as broad-based expectations for a robust economic recovery and tighter monetary policy are met with bearish data that is counter to the consensus narrative.

#Bubbles(introduced 10/2/14): The current economic cycle is cresting and the confluence of policy-induced yield-chasing and late-cycle speculation is inflating spread risk across asset classes. The clock is ticking on the value proposition of the latest policy to inflate as the prices many investors are paying for financial assets is significantly higher than the value they are receiving in return.

The Hedgeye Macro Playbook aspires to present investors with the robust quantitative signals, well-researched investment themes and actionable ETF recommendations required to dynamically allocate assets and front-run regime changes across global financial markets. The securities highlighted above represent our top ten investment recommendations based on our active macro themes, which themselves stem from our proprietary four-quadrant Growth/Inflation/Policy (GIP) framework. The securities are ranked according to our calculus of the immediate-term risk/reward of going long or short at the prior closing price, which itself is based on our proprietary analysis of price, volume and volatility trends. Effectively, it is a dynamic ranking of the order in which we’d buy or sell the securities today – keeping in mind that we have equal conviction in each security from an intermediate-term absolute return perspective.

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Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

Events This Week

Chart of the Day

Recent News Flow

Monday, December 15th

BOBE announced CEO Steve Davis has stepped down by mutual agreement with the board, effective immediately. The board has established an interim office of the chief executive (CFO Mark Hood, BEF President Mike Townsley) to provide ongoing leadership and oversight while they search for a new CEO.

DRI was upgraded to market perform from underperform at Telsey Advisory Group with a $54 PT.

COSI announced completion of its previously announced rights offering. Cosi anticipates issuing 13.3 million common shares for gross proceeds of $20 million.

Tuesday, December 16th

RT preannounced same-restaurant sales and traffic declines of -1% and -1.3%, respectively. This compares to same-restaurant sales guidance provided in early October of up +1-2% for the second fiscal quarter. RT is scheduled to release full second quarter earnings on January 8, 2015.

Wednesday, December 17th

PBPB announced it has signed an agreement with a franchisee to develop Potbelly shops in London. The company expects the franchisee to open 10 Potbelly shops in London over the next five years.

KKD announced Jim Morgan will transition from Executive Chairman of the Board to non-executive Chairman of the board, effective January 29, 2015.

WEN announced several changes to executive assignments among members of the current Senior Leadership Team that are designed to drive growth and restaurant development for the company. You can read more about the changes here.

QSR announced the appointment of executive officers of Tim Hortons. Elias Diaz-Sese, former president of BK AsiaPac, was appointed President, Tim Hortons. Jill Granat, former Senior Vice President, General Counsel, and Secretary of Burger King Worldwide, was appointed General Counsel and Corporate Secretary, Tim Hortons.

LOCO celebrated the opening of its newest location at Copperfield in Houston, TX.

Thursday, December 18th

DNKN offered up disappointing guidance for both 4Q14 and FY15. It expects Dunkin’ Donuts U.S. full-year same-store sales growth to be approximately +1.4% in 2014, below the current +1.8% consensus estimate. This guidance implies that 4Q same-store sales are running in the +0.5-0.8% range, well below the current +2.2% consensus estimate. In 2015, the company expects to deliver full-year same-store sales growth of +1-3% in the U.S and adjusted EPS of $1.88-1.91 (current consensus estimate is $2.02).

COSI holder AB Value Management filed to sell its total stake, 550K shares, through BTIG. The transaction is expected to occur by December 30th.

Sector Performance

The SPX (+3.4%) outperformed the XLY (+1.2%) last week, as both casual dining and quick service stocks, in aggregate, underperformed the XLY Index.

XLY Quantitative Setup

The XLY continues to be bullish on an intermediate-term TREND duration.

Casual Dining Restaurants

Quick Service Restaurants

Howard Penney

Managing Director

Fred Masotta

Analyst

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12/22/14 07:57 AM EST

December 22, 2014

BULLISH TRENDS

BEARISH TRENDS

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12/22/14 07:56 AM EST

Yen, Russia and Sentiment

Client Talking Points

YEN

Selling Burning Yens (on the bounce) vs. ramping U.S. Dollars made sense again last week. The Yen is down another -0.3% to $119.81 with no immediate-term support to $120.63 (still bullish for Nikkei, which was +0.1% overnight and is closed tomorrow), this is also bearish for Oil on the bounce (Dollar Up).

RUSSIA

Things that crash…bounce. The RTSI is +4.2% this morning after being up big on Friday, but still -42% year-to-date (which means only +72%, from here, to get whoever owned it up there back to breakeven!); massive resistance for the Russian Trading System in the 885-912 range (no support to 623).

SENTIMENT

Someone definitely didn’t want the S&P 500 to fall into year end; massive ramp in SPX (Index + Emini) futures/options of +104,196 contracts last week, putting the net LONG position at +153,107 contracts (vs. the 3 month average of +19,661 and easily the biggest net long position of the year).

Asset Allocation

CASH

56%

US EQUITIES

5%

INTL EQUITIES

0%

COMMODITIES

0%

FIXED INCOME

31%

INTL CURRENCIES

8%

Top Long Ideas

Company

Ticker

Sector

Duration

EDV

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). U.S. real GDP growth is unlikely to come in anywhere in the area code of consensus projections of 3-plus percent. And it is becoming clear to us that market participants are interpreting the Fed’s dovish shift as signaling cause for concern with respect to the growth outlook. We remain on other side of Consensus Macro positions (bearish on Oil, bullish on Treasuries, bearish on SPX) and still have high conviction in our biggest macro call of 2014 - that U.S. growth would slow and bond yields fall in kind.

TLT

We continue to think long-term interest rates are headed in the direction of both reported growth and growth expectations – i.e. lower. In light of that, we encourage you to remain long of the long bond. The performance divergence between Treasuries, stocks and commodities should continue to widen over the next two to three months. As it’s done for multiple generations, the 10Y Treasury Yield continues to track the slope of domestic economic growth like a glove. We certainly hope you had the Long Bond (TLT) on versus the Russell 2000 (short side) as the performance divergence in being long #GrowthSlowing hit its widest for 2014 YTD (ex-reinvesting interest).

XLP

The U.S. is in Quad #4 on our GIP (Growth/Inflation/Policy) model, which suggests that both economic growth and reported inflation are slowing domestically. As far as the eye can see in a falling interest rate environment, we think you should increase your exposure to slow-growth, yield-chasing trade and remain long of defensive assets like long-term treasuries and Consumer Staples (XLP) – which work decidedly better than Utilities in Quad #4. Consumer Staples is as good as any place to hide as the world clamors for low-beta-big-cap-liquidity.

Three for the Road

TWEET OF THE DAY

OIL: #deflation of -4.6% since June (needs to be +82%, from here, to get back to that breakeven) #DrawDownMath

@KeithMcCullough

QUOTE OF THE DAY

Practice isn't the thing you do once you're good. It's the thing you do that makes you good.

-Malcolm Gladwell

STAT OF THE DAY

Today, UPS will deliver 34 million packages, more than any other in its history.

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